The use of company credit and procurement cards is standard practice in many businesses and industries. The cards have numerous benefits, but they are not without their challenges. Savvy business and financial people understand how these instruments of convenience can turn into nightmares if not properly controlled, and they control authorized users and purchases, credit limits, and reimbursement procedures. Are these controls necessary? Absolutely!
That said, in this issue, we would like to bring to your attention another potential problem that can arise from these useful tools: sales tax. That’s right, sales tax. Below we discuss why credit cards can become a sales tax audit nightmare (or at least a bad dream) and what should be done about it.
Where’s the detail?
On countless audits, taxpayers have been assessed on credit card purchases because, quite simply, they have no supporting invoices for the transaction. The statement gets filed without any supporting detail, and upon audit, no detail can be produced to support what was purchased, how it might have been used, or if and where it was taxed. Maintaining the detail of each purchase with the card statement ensures that tax is not assessed on transactions which are exempt from tax or have already been properly taxed. It also can save significant internal time spent attempting to gather information to remove credit card purchases from potential assessment.
Where’s the sales tax?
Since credit cards are a convenient manner to make online purchases, their purchases often do not reflect the appropriate sales tax. Why? If an online retailer does not have physical presence in your state, it may not be required to register and collect your state’s sales tax. Many an online retailer has been purposefully structured in such a manner to avoid the administrative burden of collecting sales tax in multiple jurisdictions. That, however, does not absolve purchasers from the requirement to remit use tax to their state in the event they make taxable use of a product or service on which sales tax has not been collected.
Where’s the use tax?
Even for purchasers with a use tax compliance system in place, credit card purchases are easy transactions to miss. Accounting systems that identify certain vendors as those whose purchases are subject to use tax have a difficult time dealing with the credit card because of its purchases from multiple vendors. Going through credit card detail to assess the proper amount of use tax may be a far more manual process and may seem to yield less of a benefit when compared to the effort expended. These cards are also used for “one off” purchases and vendors with whom credit has not been established, yet another reason review of the purchase might be missed.
What’s the projection?
Remember those seemingly insignificant purchases on the credit card? Considered separately, the sales tax impact is small. Now put them into a statistical sample and project them. The small transaction can become far more significant.
What to do?
We would all agree that the solution is not to scrap the use of credit and procurement cards. Preventative measures can be put in place to protect you.
- Get the receipts and keep them with the statements. That means the receipts that clearly indicate whether or not sales tax has been collected and on what tax basis. Packing slips and order tracking emails are often insufficient.
- Make sure that those individuals who make the purchase provide enough information on the invoice to ensure effective use tax accrual decisions can be made. No one is better qualified to let you know what is purchased and how it is used than the person making the purchase. How this is done will vary from business to business and could include how the invoice is coded, descriptions of the purchase, etc.
- Explain why. We’ve found that most employees have absolutely no desire to expose their company to liability or have it miss savings opportunities; they just have never been educated on the “why” behind the procedures or the dollars and cents on the line.
So you’re under audit…and the credit cards are a problem…
Here are some suggestions that might help:
- Eliminate the obvious. Many auditors are willing to forgo assessment on items that are clearly not taxable or not within the taxing jurisdiction. For example, out-of-state restaurants, gas, lodging, and other travel expenses may be removed easily from potential assessment.
- Establish that the vendor collects the appropriate tax. Success here might depend on the auditor, but some auditors may be willing to remove vendors if they are comfortable that the correct amount of tax was charged. Examples of this type might include local restaurants, big box stores at which exemption certificates were not likely to be presented, telephone and Internet charges, etc.
- Get the invoices. Does the online vendor provide prior purchase history? Can invoices be reprinted?
- Prove the transaction was not taxable. Can you use other supporting documentation to verify that the purchase is exempt from sales tax? Vendor websites or other supporting documentation might be helpful here.
Credit and procurement cards are here to stay. If managing sales and use tax compliance for them keeps you up at night, we can help you design practical compliance systems for these valuable tools.